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10. A project will use equipment with a purchase price of $105,000. It will also require delivery costs of $15,000 and installation costs of $30,000. Net working capital of $25,000 will also be required. The project is expected to generate EBIT of $70,000 each year, of which $15,000 is depreciation. The useful life of the project is 10 years. The equipment will be sold for $30,000 at the end of the project. The companys tax rate is 40%, and has a cost of capital of 14%. What are the initial outlay and free cash flows for the project? a. b. What is the NPV for the project? Using excel, what is the IRR for the project?

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C3 Incrementa Net working Free cash Tax@40%, Net income Depreciation | l cash flows | capital $ (25,000)| $ flows |PVI F @ 14% | Present value 1.000 S (175,000.00) 0.877 $ 50,000.00 0.769$ 43,859.65 0.675 $ 38,473.38 0.592 $ 33,748.58 0.519 $ 51,936.87 1 Year EBIT Investment 0 1 $70,000 $ 28,000 $ 2 $70,000 28,000 $ 3 $70,000 $ 28,000 $ 4$70,000 28,000 $ 5$70,000 28,000 $ 42,000 $ 15,000$ 57,000 42,000 $ 15,000$ 57,000 42,000 $ 15,000$ 57,000 42,000 $ 15,000$ 57,000 (150,000)| $(175,000) $ 57,000 $ 57,000 $ 57,000 $ 57,000 18,000 $ 100,000 15,000 57,000 $25,000 :30000(1-40%) 10 IRR 23.02% Net present value $43,018.47 12 13 14 a) Initial outlay $ (175,000)-105000-15000-30000-25000 15 Free cash flows $ 57,000 16 b) NPV 17 $43,018.47 23.02% IRR

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